Rexam: Buy, Sell or Hold?

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold... and those I feel you should sell!

I'm assessing every share on five different measures. Here's what I'm looking for in each company:

  1. Financial strength: low levels of debt and other liabilities
  2. Profitability: consistent earnings and high profit margins
  3. Management: competent executives creating shareholder value
  4. Long-term prospects: a solid competitive position and respectable growth prospects
  5. Valuation: an under-rated share price

A look at Rexam
Today I'm evaluating Rexam  (LSE: REX.L  ) , one of the largest consumer packaging companies in the world, which currently trades at 438 pence. Here are my thoughts:

1. Financial strength: Since nearly losing its investment-grade credit rating three years ago, the company has strengthened its balance sheet, decreasing net debt for a third straight year down to £1.3 billion, which is only 1.8 times EBITDA. Interest cover is ample at eight times and free cash flow has been robust, averaging £300 billion the last three years.

2. Profitability: Rexam had been a steady and consistent performer throughout most of the decade, growing revenues and earnings per share at modest rates of 5% and 4% per year, respectively. However, in 2009, due to a weak global economy and an expensive acquisition in 2007, the group reported losses of £29 million. It had to cut dividends from 18 pence in 2008 to 8 pence in 2009 and launch a rights issue.

However, in the last three years, Rexam has increased earnings per share 19% and dividends per share 34% per year. Operating margin has expanded from 9% in 2009 to 12% in 2011, while return on capital employed has increased from 10% in 2009 to 14% in 2011.

3. Management: Investors are probably still wary of the significant share dilution from the rights issue in 2009, which increased shares from 720 million to 876 million. However, management appears to have gotten its act together after the rights issue. It has reduced net debt and divested weakly performing divisions, such as the closures and personal care business, and is instead focusing on the higher-margin health care business, which offers more growth opportunities, and the core beverage-packing business, which accounts for 80% of its revenues.

4. Long-term prospects: Rexam is one of three major producers of beverage cans in the world, which together supplies 60% of the global supply. It is the largest beverage can maker in Europe and South America and the second largest in the U.S. Its customers include top multinational companies such PepsiCo and Coca-Cola  (NYSE: KO  ) . Rexam has been increasing its presence in emerging markets with growing operations in Russia and Brazil and is the first global player in the Indian market. These countries now contribute over 30% of the company's total revenues. Furthermore, it has signed new deals and expects to regain most of the volume lost in North America in 2011 by 2013. The group expects a growth rate slightly above GDP in the next few years.

5. Valuation: Rexam's shares have increased 22% since January, and analysts forecast earnings per share of 36 pence for the year, giving the group an undemanding forward price-to-earnings ratio of 12. It also returns an above-average-dividend yield of 3.5%.

My verdict on Rexam
In the three years since the height of the financial crisis, Rexam seems to have regained its footing and is headed in the right direction. It has strengthened its financial position and streamlined its operations. It also boasts of a diversified portfolio of potential growth drivers, improving returns on capital and rising dividends.

So, overall, I believe Rexam at 438 pence looks like a buy.

More FTSE opportunities
Alongside Rexam, I am also positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond.

Various opportunities are covered in the report. One might provide "solid returns and... nice dividends", another could offer "global diversification and long-term growth potential," while a third looks a "high-quality business" from a battered sector.

You can read "The Market's Top Sectors" today by requesting the report for free. But hurry, the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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Further Motley Fool investment opportunities:

Zarr Pacificador does not own shares in Rexam. The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola and of PepsiCo. The Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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